Govt takeover of highway concessions a positive development for Gamuda

KUALA LUMPUR: The recent announcement that the federal government is in talks with Gamuda Bhd (Gamuda) to negotiate for the acquisition of four highway concessions that the company has a majority stake in is a positive development for Gamuda says research arm of Kenanga Investment Bank Bhd (Kenanga Research).

The four highway concessions are Lebuhraya Damansara Puchong (LDP), Sistem Penyuraian Trafik KL Barat (SPRINT), Lebuhraya Shah Alam (KESAS) and SMART Tunnel.

In a quick bites report, Kenanga Research announced that they are positive with the new on privatisation of the four tolled highways as it would an opportunity for the group to strengthen their coffers.

“Based on our Sum-of-Parts valuation, we expect Gamuda to fetch circa RM2.8 billion, we believe that our expectations are conservative, as we did not factor in the potential extension for KESAS, which is slated to end in 2023, in divesting all their equity stakes in these four concessions to the government,” the research arm explained.

“That said, we also expect its 1Q19 net gearing of 0.58-fold to be reduced to 0.22-fold, but we do not expect any special dividends from this exercise as we believe that management might utilise the proceeds for reinvestment purposes,” it added.

Additionally, Kenanga Research also lauded the improvement in the communication of the development as the communication channel for this particular development had been an official announcement from the prime minister’s office, which sends a clear and concise message to investor on the abovementioned privatisations.

“We laud the government for their efforts in trying to ease the Rakyat’s burden, and the potential privatisation move would allow Gamuda to unlock the value in these four concessions and focus on growing its construction and property development businesses,” said the research arm.

Looking ahead, Gamuda’s management has guided that it will be competing in the building space targeting both private and government building works to help alleviate the expectation of a slower year ahead.

Recently, they have bagged a RM900 million award for building works to construct a high-rise residential and additional works from PNB118.

As for their property division, they are maintaining a sales target of RM4.0 billion backed by local launches but registering only circa RM600 million worth of sales in 1Q19.

Currently, Kenanga research is maintaining their FY19-20 estimated earnings for now as it is still early days on the highway concession takeover, but should the privatisations materialise, they guide that we would likely see a reduction of circa 48 per cent in our FY19-20 earnings.

Despite the positivity on the potential hjighway privatisation exercise, the research arm is downgrading their call on Gamuda to market perform with an unchanged SoP-driven target price of RM3.05 as its share price registered year-to-date return of circa 30 per cent, which could have priced in the potential privatisation exercise.